Gold (16 page)

When the state allowed him to return to teaching in 1972, it still considered him politically unreliable. His school would not let him teach about strategic minerals, such as uranium. Gold, on the other hand, was ideologically inert. Lenin had defined its place in socialist thinking in 1921 when he said, “When we are victorious, we will make public toilets out of gold.” Even a doubtful character like Zhu could be allowed to teach about such a lowly metal. “And right away,” he said, unfolding his elegant hands as if revealing a discovery, “I found it interesting.”

Mao died in September 1976. One month later a coup toppled the Gang of Four, the powerful executors of Mao's policy. The reformer Deng Xiaoping took power. Gold returned to favor as a mineral with obvious attractions to a country eager for foreign exchange. In 1978 the gold price averaged $200. The next year it hit $520.
Spurred by the prospect of potential gains, the Chinese military established a gold prospecting unit. The Gold Army, as this new corps was called, grew into a force of 20,000 gold explorers.
Zhu became adviser to the top Gold Army leaders. In three years he jumped from
the backseat of Chinese geology to the front. His rise mirrored China's swift U-turn. Deng abolished class-based discrimination. The banker's son was not only rehabilitated, but in the midst of a booming, reinvigorated industry. Gold officials commanded large forces and broad powers. What they lacked was knowledge.

The transformation of China from midsize producer to the top of the gold mining world is a story Zhu helped write. By touring foreign mines and organizing a symposium for Western gold geologists, he opened the door to the technology that has helped China unlock its reserves. In its strategy for exploiting this newly fashionable resource, China demonstrated an extractive genius far ahead of its abilities in the field: a knack for mining Westerners.

It's the richest gold deposit in China. We found it, we defined it, but they just were not going to let us keep it.

—Colin McAleenan

I
N
1993,
TO ENCOURAGE EXPLORATION
and expand its gold reserves, China loosened regulations and opened the door to foreign miners. Even Chinese state-owned companies could now raise exploration money by selling shares to private investors. One large foreign gold miner to take advantage of the opportunity was Placer Dome Inc., an international miner based in Vancouver. Placer Dome had been doing business in China since the 1960s, supplying copper and molybdenum to China National Nuclear Corporation. In 1997, through its Australian subsidiary, the company hired two Chinese geologists, formed Placer Dome (China) Ltd., and started looking for gold.

In 1997 China was the world's fifth-ranked gold producer. Largely unexplored by Western standards, China looked like a rosy
prospect. Not only had the country loosened restrictions, but the all-important Five-Year Plan, the government's regular economic manifesto, made the restructuring of the mining industry a key objective.
Placer Dome had a five-year plan of its own: train Chinese staff to higher standards; demonstrate that “large mineral systems” existed in China; and get the clear title they would need to develop them. They did train up their staff, they found a target, and in five years had their business license. When it was time to lock up title, here's a partial list of what they learned:

• three different levels of government can issue title

• not all title information was on the same register

• access to the registers was limited

• access to state geological data was limited

• topographic data was a state secret

• reserve calculations were not based on international market standards

• owners' share of revenue would be “modest”

In the end Placer Dome got nothing but the doubtful pleasure of transferring expertise to China.
It was a pleasure the Chinese were anxious to supply to others, as Colin McAleenan discovered.

McAleenan, an Irishman, had studied geology at Trinity College Dublin. When he graduated, he worked in far-flung parts of Canada, until he settled in Vancouver. He was an experienced field geologist and exploration executive when in 1994 he made his first trip to China to scout for targets. In the next few years he examined a gold prospect in Szechuan and traveled to Inner Mongolia to look at properties.

In 1999 McAleenan visited the glittering port city of Dalian for China's first international mining conference. Backing him were a pair of American investors: Robert Kiyosaki, the creator of the bestselling
Rich Dad Poor Dad
series of motivational books; and Frank Crerie, an Arizona-based financier who had made fortunes in uranium and oil.

With the Dalian mining conference, the Chinese government hoped to attract foreign mining capital to the country. McAleenan represented money looking for ground to drill. “It was the first year they'd held the conference,” he said. “They wanted to create the hottest mining event in Asia, but at first it was poorly attended. They gave technical talks on China's mineral endowment and the country's open-door policy, but there were only two or three booths where provincial government entities were showing off their projects.” One of these properties caught McAleenan's eye. It belonged to the Bureau of Mineral Resources of Liaoning, the province Dalian was in. “They had paper on a number of projects, and one was intriguing. I brought it away with me, and we thought about it, and then I came back for a look.”

McAleenan flew into the provincial capital of Shenyang and took the expressway down the spine of the Liaodong Peninsula. The road was one of the first of China's now ubiquitous multilane highways. It had been built by Bo Xilai, the mayor of Dalian and one of China's fastest-rising politicians. Bo's career blew up later in a scandal fed by corruption charges, Communist Party infighting, and his wife's alleged involvement in the murder of a British businessman. But in 1999 he was in the forefront of China's speed-of-light emergence into the modern world, and the expressway symbolized the sense of opportunity and commercial vitality that China's leaders wanted to project.

The terrain of the peninsula was rough but not mountainous. A sparsely covered sawtooth range of hills extended into the Bohai Gulf. McAleenan reached the exploration target, at a place called Maoling, or Cat Hill. The provincial geology bureau had drilled some holes on a quartz-vein target. “They were using pretty old equipment,” McAleenan said. “They had these massive Russian drills that could drill a vertical hole hundreds of meters deep, but that's it. If the vein dipped steeply [descended at an angle] they couldn't intersect it. It was antiquated.”

McAleenan took rock samples from outcrops, including material from the veins and between the veins. He took the samples back to North America for assay, and waited to see what he would find. When the results came back, he was amazed. “Not only were the narrow veins rich, but the material between the veins had gold too.”

McAleenan thought that the best way to tackle the deposit would be to mine the whole hill in an open pit bulk operation, instead of trying to follow the veins. Such a method would result in a lower grade overall, but since capital costs and operating costs were low in China, and he expected the gold price to rise, he believed such an operation would be profitable.

On behalf of the American financiers and Mundoro Mining Inc., a company set up to exploit Chinese targets, McAleenan negotiated a deal with the corporate arm of the Liaoning province minerals department. In July 2001 the parties formed a joint venture to exploit Maoling. Under the agreement, Mundoro would earn a 79 percent share of profits in return for funding and directing all the exploration and carrying the project to production.

For two years Mundoro worked flat out. They drilled sixty-two holes, pulled 20,000 meters of drill core from the hill, and trenched for 13,000 meters. They analyzed the soil chemistry, translated earlier
Chinese documents about the site, and sank some pits. In the end they had enough evidence to report to the market a deposit containing 1.1 million ounces of high-probability “indicated resource,” and more than 4 million ounces “inferred,” meaning ground that they expected to raise to the “indicated” level with more drilling.
In November 2003 they took the company public and raised $13 million.

An eager wind was blowing through the Chinese gold scene. The open-door policy to foreigners had sent junior exploration companies fanning out into the country looking for property to drill.
One of the most hyped of these was the Boka prospect, a target in Yunnan. Villagers had discovered gold in the hills; the regional gold brigade had drilled it; a Vancouver junior called Southwestern Resources Corp. had swept in and grabbed the license. “Junior” means a small mining company focused on exploration. Southwestern drilled sixty-seven holes and estimated a resource of 150 tons. At the grades they claimed, the deposit would hold 5 million ounces. Promoters started calling Boka the highest-grade gold deposit in the country, and talked about a windfall of $40 million for the local economy.
Southwestern's market capitalization grew to more than three quarters of a billion dollars.
“The problem,” said an official, after several years went by, “is that at the moment, nobody knows when the first piece of gold will be found.”

Alas, somebody did know. Southwestern's Canadian CEO knew. He knew that the first piece of gold wasn't coming up anytime soon, because he'd been falsifying the drill results.
Southwestern's share price later collapsed and in 2013 the executive went to jail, but in the heady Chinese gold rush scene of 2003, with the whole country flung open like some fantastic oriental Yukon, the news about the Boka strike was pumping helium into everyone's balloon. “It probably helped our financing,” McAleenan said.

What helped even more was that all of McAleenan's holes were hitting gold. “We couldn't miss. We had long intersections [where the drill was passing through gold-bearing rock].” Mundoro's home page showed a panorama of the site, and if still there it's worth a look. The ore body stretches from a little loop of road cut into the top of Cat Hill on the left, all the way across the hills to the right and out of frame—a strike of half a mile. You can see the exploration tracks hacked through the vegetation. The gold price was rising. Mundoro's share price was rising. After two years of intensive exploration Mundoro went back to the market for more cash.
They raised another $25 million. The shareholders were confident. McAleenan was confident. The American financiers behind Mundoro must have been confident too. Then the business license came up for renewal. It didn't get renewed.

The date came and went. At first there seemed no cause for worry. “We sent our people to ask why we didn't have the license,” McAleenan said, “and got answers like ‘It's nothing—just the way things work in China,' ‘Things move at their own pace,' ‘They're always late,' so we didn't worry. But when months passed, we started to get concerned. We could get no action from the Liaoning province officials, so we went to Beijing.”

There were two licenses Mundoro needed. The first was the local business license, and the second was the exploration permit. To continue work at all, that permit was essential. Issued in Beijing, the permit called for a regular accounting of money spent on exploration. “We had exceeded the minimum requirements,” McAleenan said. “We'd drilled 40,000 meters. We'd done environmental and geotech studies. We'd advanced the project on a number of fronts simultaneously. We had developed two scenarios: one for a 30,000-ton-a-day mill and one for 50,000 tons. We were calling it the largest undeveloped
gold deposit in China, if not in Asia. Our share price at the initial offering had been $1.25 and now it was more than $4.00.”

In Beijing, Mundoro went to the land resources ministry and asked if their permit would be a problem. No, said the officials, it would not . . . as long as Mundoro got the business license. Without the license, the ministry said, Mundoro did not exist legally.

You can see where this is going: McAleenan's dawning realization that they were going to get screwed; the appeals to diplomats in Beijing; trade attachés getting cold-shouldered at the ministry. Up in the Liaodong Peninsula provincial bureaucrats were sitting on the business license, and if they were sitting on it, someone had told them to sit. Mundoro's title to the property, like Mundoro's joint venture, just “did not exist.”

McAleenan left the company at the end of 2006, after a year of futile attempts to preserve Mundoro's entitlement. Five years later the company managed to recover $13.5 million, the amount raised by the initial stock offering.
Instead of 79 percent of profits, they were reduced to 5 percent.

“If it had been a lead-zinc deposit,” McAleenan said, “I don't think we'd have had a problem. But the political leadership decided they wanted to keep the gold for themselves. It was a national asset. It was the biggest gold deposit in China and they were not going to let a foreign-controlled joint venture have it. I think that 9-million-ounce deposit is going to be more like 18 million. It's the richest gold deposit in China. We found it, we defined it, but they just were not going to let us keep it.”

At Maoling, China won two prizes: the gold mine, and the skills that had developed it. They'd had a front-row seat while their partners drilled out the deposit. I think it's fair to say they decided they could take it from there, using a skill set that they did possess—the
operation of an impenetrable bureaucracy. In the Chinese gold rush of the day, most Western companies went home unsatisfied. Toxic Bob did not.

W
HEN
C
HINA MADE THE
1993
decision to encourage mine development, it allowed any Chinese company, no matter its core business, to explore for any metal, and in 1995 China National Nuclear Corporation dug up some ore on a lonely ridge in Inner Mongolia called Chang Shan Hao. China Nuclear had known there was gold in the area because artisanal miners had been scratching out a living. The company excavated a pit, made three test heaps of ore, dribbled cyanide onto them for thirty-two days, and recovered 65 percent of the estimated gold content. Then they went looking for a Western partner.